Sustained Growth Needed

Annual new single-family housing sales increased 12.4% to 654,000 units from June’s rate of 582,000 homes, according to seasonally adjusted data released by the U.S. CensusBureau and the Department of Housing and Urban Development (HUD). This is the single largest monthly increase in the annual rate since May 2014 and drew much attention from the business media.

Time to celebrate?

Not so fast.

Even though July's rate was the highest in volume since October 2007, when compared to movement in the annual average for not seasonally adjusted new home sales data, the recent jump looks more like the typical market gyrations inherent in the data. The trend is what is important.

The chart below graphs both the seasonally adjusted annual new home sales and the 12-month moving average not seasonally adjusted data for comparison from January 2000 to July 2016. The not seasonally adjusted average is center weighted or lagged six months to more closely align with the seasonally adjusted data series. Using the not seasonally adjusted average yields a smoother trend line with fewer peaks and valleys month to month, but lagging it cuts the series short.

However, the trend is clearly increasing as it has since bottoming out in early 2011. Based on the apparent trend in new home sales, the seasonally adjusted annual total for August should come in at between 580,000 and 600,000 units, about a 10%-12% decline from July.

While the news that new home sales appear to have shot up in July is welcome, sustained growth is more desirable. Builders have been slow to increase speculative development, but the recent spike in sales has finally reached the average level of new home sales from 1968-2000 of about 650,000 homes annually. It may be some time before they reach the elevated average annual level of more than one million units seen during the run up to the housing bubble from 2000-2007.

New home sales comprise only about 10% of overall home sales. Existing home sales were down by 3.2% in July, according to the National Association of Realtors (NAR). A shortage of affordable inventory is hampering sales as prices continue to climb for existing homes. Months of inventory is extremely tight for both new and existing homes. Unsold existing inventory is at a 4.7-month supply at the current sales pace, which is up from 4.5 months in June, while new homes have a 4.3-month supply, according to the NAR and Census, respectively. Perhaps the industry standard of six months for a healthy market may have to be lowered to four or five if the current levels become the new norm.

The other data series in the chart are the seasonally and not seasonally adjusted annual single-family starts data from the Census Bureau and HUD. As with new home sales, the seasonally adjusted series exhibits more volatility, while the not seasonally adjusted series is smoothed. Although there is not a perfect correlation between new home starts and sales, the two series do trend very closely together. The large gap between the two series is a function of what is included as starts compared to new home sales. Single-family residential starts include the homes built for four differing intents or purposes:

Built for sale (or speculatively built):

The builder is offering the house and the developed lot for sale as one transaction. This includes houses for which ownership of the entire property including the land is acquired ("fee simple"), as well as houses sold for cooperative or condominium ownership.

Contractor-built (or custom-built):

The house is built for the landowner by a general contractor, or the land and the house are purchased in separate transactions.

Owner-built:

The house is built entirely by the landowner or by the landowner acting as his/her own general contractor.

Built for rent:

The house is built with the intent that it be placed on the rental market when it is completed.

New home sales include only the first category – those built for sale – and excludes custom-built homes, which comprise about 15% of all single-family starts and owner-built and rentals which are about 11% of the starts total. Note that the spread between single-family starts and new home sales almost disappears in 2009 during the Great Recession, as custom and owner-built home starts virtually vanished and spec construction also plummeted. That spread has begun to widen in recent years as the economy improves and new home construction continues its recovery. July’s seasonally adjusted annual single-family starts of 770,000 units came in at close to the recent trend line (since 2011) and should be between 770,000 and 820,000 units in August.